2018 (7) TMI 1765 - HC - VAT and Sales Tax

Withdrawal of compounding application - Compounding of tax - KVAT Act, 2003 - Rule 11 of the Kerala Value Added Tax Rules, 2005 - Held that - Unless the compounding application is accepted by an order of sanction, it does not become a concluded contract. If there is no concluded contract between the parties, the application remains only as an offer which could be withdrawn at any time and the assessee can go for regular assessment. Viewed at a different angle, if after payment of quarterly tax the compounding application is rejected, necessarily, the assessee will have to file returns by producing the books of account. Therefore, payment of tax at compounded rate by itself cannot be a reason for concluding that there is a concluded contract between the parties. The appellant ought to have been given an opportunity to withdraw the compounding application especially when no sanction had been issued during the assessment year - The appeals are only to be allowed and an opportunity should be given to the appellants/petitioners to file regular return for the respective assessment years. However, it is made clear that the appellants shall not be entitled for refund of any amount paid towards compounded tax. Appeal allowed.

Summary

Issues Involved:
1. Withdrawal from compounding under the Kerala Value Added Tax Act, 2003 (KVAT Act).
2. Application of Section 56 of the Indian Contract Act, 1872.
3. Interpretation of Rule 11 of the Kerala Value Added Tax Rules, 2005 (KVAT Rules).
4. Precedent cases and their applicability.

Issue-wise Detailed Analysis:

1. Withdrawal from Compounding under the KVAT Act:
The appellants, who are assessees under the KVAT Act, opted for compounding and paid the quarterly compounding tax. However, they sought to withdraw their compounding application during the assessment year due to their inability to carry on business. The learned Single Judge ruled that compounding is a contract that cannot be withdrawn. The Court found that the factual and legal position indicated no subsequent supervening circumstance creating an impossibility in performing the obligations under the contract.

2. Application of Section 56 of the Indian Contract Act, 1872:
The appellants argued that their inability to obtain the necessary permits and licenses made it impossible to perform their obligations, invoking Section 56 of the Indian Contract Act. The Court, referencing Naihati Jute Mills Ltd. v. Khyaliram Jagannath, held that courts cannot absolve parties from performing their part of the contract merely because the performance has become onerous due to unforeseen events. The learned Single Judge concluded that the petitioner's situation did not merit consideration under Section 56, as there was no supervening impossibility.

3. Interpretation of Rule 11 of the KVAT Rules:
The appellants contended that Rule 11 of the KVAT Rules allows for the rejection of a compounding application by the assessing authority, and since no permission for compounding was granted, they should be allowed to withdraw their application. The Special Government Pleader argued that this contention was not raised before the learned Single Judge and that the parties proceeded on the assumption that there was an order of compounding. The Court noted that the appellants had raised specific pleadings regarding this issue, and in the interest of justice, it should be decided rather than relegating the parties to seek a review.

4. Precedent Cases and Their Applicability:
Several precedent cases were discussed:

- Raju Jacob v. Sales Tax Officer: The Court held that once an assessee opts for payment of tax by compounding, they cannot withdraw the option subsequently. However, this case was distinguished as it involved an order passed by the assessing authority granting permission to pay compounded tax, which was not the situation in the present cases.

- State of Kerala v. T.S. Kalyanaraman: The Court held that submission of an application and payment of compounded tax indicates a commitment to pay the compounded tax, and the assessee cannot withdraw from this obligation after the assessment year. This case was distinguished as the assessees in the present cases sought to withdraw their compounding application during the assessment year itself.

- Zodiac Regency v. Commissioner of Commercial Taxes: The Court held that once a compounding application is filed and tax is paid, both the assessee and the department are bound by it unless the assessee recalls the application before starting payment of tax in terms of the compounding scheme. This case was also distinguished as the appellants in the present cases sought to withdraw their application during the assessment year.

Conclusion:
The Court concluded that the appellants in WA No.871/17 and WA No.239/18 should be allowed to withdraw their compounding applications and file regular returns for the respective assessment years. However, they would not be entitled to a refund of any amount paid as compounded tax. The judgments of the learned Single Judges were set aside, and the writ appeals were allowed accordingly.